Market analysis on behalf of Hani Abuagla Senior Market Analyst at XTB MENA
Not so long ago, the investment world was waiting to see which company would be the first to reach the magical $1 trillion mark. In 2018, the American company Apple (white line) was the first to do so. Apple was subsequently the first to surpass the $2 trillion mark in 2020, and in 2022, it briefly reached $3 trillion within a day, although its value later fell and finally surpassed it in 2023. All this time, Microsoft (blue line) was always just a little behind Apple. Now, however, we have a company that has dethroned Apple from this point of view, and the new king is none other than Nvidia (green line), which briefly became the first company to surpass the $4 trillion mark yesterday, although it ultimately ended the day with a value just under $4 trillion. Nvidia crossed the $1 trillion mark in June 2023, $2 trillion in February 2024, and $3 trillion in June of the same year. Nvidia’s journey was therefore the fastest of all companies.
Nvidia has been on a roll for the past few years. The company was doing very well even before the AI craze, but it was artificial intelligence that significantly increased Nvidia’s profits and its market capitalization. Interestingly, since 2019, the company’s shares have grown by high double or even triple digits. The only exception was 2022, when the entire market was in a correction.
Nvidia has a few other firsts, too. It’s the only S&P 500 stock to outperform Bitcoin over the long term (or perform similarly, depending on the time period you’re looking at), and according to Finviz, it’s also the best-performing stock in the index over the long term. Over the past 10 years, Nvidia’s stock has risen 32,298%, while AMD’s stock has risen just 5,667%.
But what is causing such an incredible growth in the shares of a company that was known mainly as a graphics card manufacturer a few years ago? The answer is artificial intelligence. Nvidia started developing chips that are used in connection with artificial intelligence a long time ago (the company’s largest customers are Microsoft, Meta, Alphabet and Amazon). About 3 years ago, there was a big boom in this area in the world and it turned out that Nvidia is the only company in the world that can supply such expensive and specialized AI chips on a larger scale (it does not cover the entire demand anyway). In this case, number two is AMD by a long way, but it supplies customers with about 90-95% fewer chips. Thanks to Nvidia’s practically monopoly position in this area, it can set almost any price for customers. Customers know that falling behind in this area can be dangerous. In recent calls with investors, the management of several large technology companies stated that they would rather be overinvested than underinvested. Nvidia’s sales, profits, and margins have been soaring in recent years. Nvidia currently operates with a net margin of around 50%, which is extremely high. The margins of most other technology companies are usually around 20 to 30%, which is about half that.
But why is it Nvidia that managed to surpass this threshold first and not, for example, Alphabet, Apple or Google, which achieve higher profits? In the last 12 months, Apple earned 108 billion, Alphabet 103 billion, Microsoft 97 billion and Nvidia 77 billion USD, while Alphabet, for example, is expected to earn up to 125 billion USD this year. So it would be logical to think that someone else would be the first to surpass 4 trillion.
Simply put, current earnings are only part of what market capitalization reflects. Very simply put, investors look at how a company is doing and what its future prospects are when investing. In the case of Nvidia, these are very good, and significant growth in sales and profits is expected in the coming quarters. I won’t bore you with specific numbers, but if everything goes according to plan, Nvidia could become the company that achieves the highest profit among all companies, well above the level of 100 billion US dollars per year, in a few years. Yes, of course everything has to go according to plan. Demand for AI must continue to grow, AMD or other competitors will not be able to significantly increase the scale of production, nor introduce more technologically advanced or significantly cheaper chips, the economy must be in good shape, and so on. Likewise, the world will still have to believe that AI will push humanity’s productivity further, and technology companies will still have to want to spend hundreds of billions of US dollars per year on chips and other infrastructure. Further problems may also come from export restrictions to China, which is still a relatively important market for the company, which could slow down Nvidia’s progress.
With such a highly valued company, any hesitation could be significantly punished by a drop in share prices from the market’s perspective. There are therefore quite a few risks. However, the entire concept of investing is based on the investor looking for a favorable ratio of potential and risk taken. The ratio of these two things is currently in the case of Nvidia, but each investor must evaluate for himself. The race to $4 trillion is therefore over and it will certainly be interesting to see which company will be the first to reach around $5 trillion. Will it be Apple, if it solves its problems in the field of AI? Will it be Microsoft, from which significant cloud growth is still expected? Will it be Amazon, which is finally starting to make big money, or Google, which is currently doing very well financially, but is threatened by several things, from changing the way it searches, to new competition, to antitrust lawsuits? Or will someone completely different, such as Tesla, surprise in the end? Will it be Nvidia again, where everything currently looks great? We will probably have to wait a while for the answer. Either way, Nvidia’s success is phenomenal and we congratulate them on their achievement.